What is partnership in business? Meaning, Advantages and Disadvantages

Partnership - Meaning, characteristics, advantages and disadvantages

Meaning of Partnership – When you are talking about business organizations, the two popular types that comes to mind are sole proprietorship and partnership. Earlier in my article, I explained the meaning of Sole Proprietorship. Here, I am equally going to discuss partnership as a type of business organization. A Partnership is a type of business organization in which two or more individuals make a legal agreement to own and operate a unit with a view to make profit.

In this type of business organization, the two individuals who come together to do business are called business partners. There are so many things that can prompt the formation of this type of business organization. At times, a single individual may not be able to posses the resources, skills or ideas in order to run such a business effectively, hence, the need to form a partnership.

Types of Partners

Having explained the meaning of partners, now, the partners can be classified into two based on their roles;

1. Dormant/Inactive Partner

This type of partner usually limits his interest and participation in a partnership to only the provision of capital and sharing of the profit or losses of the organization. He does not participate in the running and management of the organization. He is also known as the sleeping partner. It is also pertinent to note that his liability is only limited to the amount of capital he invested in the organization.

2. Active Partner

An active partner do not only supply the funds needed for operating the business but also takes part in the running and management of the business. He equally shares in the profit and losses of the business.

Yes, we have known the two types of partnership. For the smooth running of the business among these partners, there is a written agreement known as the deed of partnership. Here, the nature of the business, management, financial contribution, profit and losses, sharing of business responsibilities etc are made well known. One of the advantages of the deed of partnership is to avoid conflicts that may arise in the course of running or ending the business.

Types of Partnership

There are three types of partnership, they are; Limited Partnership, General Partnership and Limited Liability Partnership.

Let me give you a brief explanation of each of them;

General Partnership; In this type of partnership, each partner have equal right. Each of them are responsible for the management, decision making, liabilities, sharing of profits or any other issue arising from the business.

Limited Partnership; It involves a general partner who has an unlimited liability and a limited partner with a limited liability. This means that the limited partner is limited to his contribution in the business. In most cases, they do not take part in the day-to-day running of the business. Their liability is limited to their contribution.

Limited Liability Partnership; In this type of partnership, each partner is limited to his contribution in the business.

Advantages of Partnership

The partnership form of business enjoy its own benefits, which are discussed below;

1. A good way to raise sufficient capital for operating an enterprise

Unlike the sole proprietorship who funds his business alone, in the partnership form of business organization, two or more individuals pool their resources together to make more capital available for their venture. They also have more chances of getting loans from the financial markets and banks.

2. Combination of talents and skills for the smooth running of the business

The partners coming together have their individual skills, ideas and talents which they will use to run their partnership business. Also, there are high chances that there will be division of labour where each Partner may undertake an aspect(s) of the business. This may lead to higher profit and efficiency.

3. There are more chances of longevity than in one-man business

Unlike in the case of sole proprietorship, where the death or inability of the owner can lead to the end of the business, a partnership has a longer life span. This is because its success or discontinuity is not dependent on one man. Where any of the partners dies, gets tired or is unable to continue, new partners maybe admitted into the business. In some cases, the admission of new members with special skills and talents can take the business to a higher level.

4. Losses in the business are shared among partners

The losses and misfortunes arising from the venture is shared among partners. This will equally ensure that the business continues because they can equally source for additional capital to continue the business. A sole proprietor may not be able to recover from a significant amount of loss because if he fails to get additional capital, that maybe the end of the business. So, risks and misfortunes are equally shared here.

Disadvantages of Partnership

It also have its own disadvantages which are;

1. Decision taking maybe unduly long

A business functions effectively when decisions are taken in time and also implemented. This is among the benefits of sole proprietorship. In partnership, the process of arriving at a conclusion in matters concerning the operation of the business may take unnecessary time. Disagreement in some issues may also affect the time frame required in arriving at a conclusion.

2. Financial mismanagement and bad management can lead to the liquidation of the business

A partnership can be liquidated as a result of financial mismanagement and bad management. This can affect the partners who have unlimited liability in the business. This may lead to the forfeiture of their possessions in order to meet up with their outstanding obligations to their creditors. A single partner can lead to the dissolution of the business when there is a mistrust.

3. It is difficult to sell this type of business at times

Due to the different partners involved in such type of business organization, there maybe disagreement when trying to sell such a business. This traps the capital resources of any of the partners who may not be interested in the business again.

Examples of Enterprises where partnership often exists

Some professions where partnerships are common includes; Engineering, Medicine, Law, Accountancy, Architecture and some types of retail trading.

I believe I have answered your question on “What is a Partnership?” Always visit for more interesting updates!

Also Read; What is a Sole Proprietorship? Characteristics, Advantages and Disadvantages